SHLDQ - Sears Holdings Corp

[Luke 532]

23.5 million shares.

 

http://www.sec.gov/Archives/edgar/data/1056831/000091957414000659/d1450713_13g-a.htm

 

nice  :)

 

BB certainly put his money where his mouth is. Now let's see how ESL and Eddie do...

 

Fairholme/Berkowitz added 3,468,073 shares in Q4 2013 (from 20,758,000 to 24,226,073)… an increase of 16.7% since the previous quarter.  I expected him to add but holy smokes that's a huge increase on an already very, very large position.

 

 

[mcliu]

M = can someone explain the guarantor/non-guarantor structure?  I don't think it's ever been discussed before even though I've asked several times.

 

Frickin' hilarious - this is what this thread needs!

Oh, and I vote for "M" !

 

I thought we don't really know what M is..

[FCharlie]

Berkowitz now controls almost as much as Eddie Lampert personally controls.

 

Would love to see Eddie buying, but last I remember, he was restricted from buying or selling. Not sure when/if that restriction is lifted.

 

 

[Lance]

23.5 million shares.

 

http://www.sec.gov/Archives/edgar/data/1056831/000091957414000659/d1450713_13g-a.htm

 

nice  :)

 

BB certainly put his money where his mouth is. Now let's see how ESL and Eddie do...

 

Fairholme/Berkowitz added 3,468,073 shares in Q4 2013 (from 20,758,000 to 24,226,073)… an increase of 16.7% since the previous quarter.  I expected him to add but holy smokes that's a huge increase on an already very, very large position.

 

Bruce is not playing around.  I suspect many of his investors are nervous.  I'm considering adding to Fairholme. 

 

Thanks,

Lance

[merkhet]

Luke was right -- I was using the wrong number for my calculation -- it's a 3.46M share add...

 

Also, the liabilities don't matter if you think they can spin out those companies without any of the liabilities attached...

[peridotcapital]

Also, the liabilities don't matter if you think they can spin out those companies without any of the liabilities attached...

Yes, they can spin Lands End, Auto Centers, etc without the liabilities, but then you are left with a weaker SHLD (they are spinning out the divisions with profits because that's the only way they can load them up with debt post-spin). As a result, core SHLD is smaller, less profitable, and has the same liabilities attached to it. Therefore that equity is worth less. So you get shares in the new independent businesses, but you will also take a hit on the value of your core SHLD position. You have to factor in both sides of the equation.

[20ppy]

23.5 million shares.

 

http://www.sec.gov/Archives/edgar/data/1056831/000091957414000659/d1450713_13g-a.htm

 

nice  :)

 

BB certainly put his money where his mouth is. Now let's see how ESL and Eddie do...

 

Fairholme/Berkowitz added 3,468,073 shares in Q4 2013 (from 20,758,000 to 24,226,073)… an increase of 16.7% since the previous quarter.  I expected him to add but holy smokes that's a huge increase on an already very, very large position.

 

And Bruce is also so soft-spoken a gentleman, he wouldn't want to buy all the shares to spoil the fun for the shorts, not yet at least :)

[20ppy]

Also, the liabilities don't matter if you think they can spin out those companies without any of the liabilities attached...

Yes, they can spin Lands End, Auto Centers, etc without the liabilities, but then you are left with a weaker SHLD (they are spinning out the divisions with profits because that's the only way they can load them up with debt post-spin). As a result, core SHLD is smaller, less profitable, and has the same liabilities attached to it. Therefore that equity is worth less. So you get shares in the new independent businesses, but you will also take a hit on the value of your core SHLD position. You have to factor in both sides of the equation.

 

While the rabbits are kept on being pulled out of his hat, do we really see that the core gets weaker?

[adesigar]

Also, the liabilities don't matter if you think they can spin out those companies without any of the liabilities attached...

Yes, they can spin Lands End, Auto Centers, etc without the liabilities, but then you are left with a weaker SHLD (they are spinning out the divisions with profits because that's the only way they can load them up with debt post-spin). As a result, core SHLD is smaller, less profitable, and has the same liabilities attached to it. Therefore that equity is worth less. So you get shares in the new independent businesses, but you will also take a hit on the value of your core SHLD position. You have to factor in both sides of the equation.

 

This was in relation to a question about how some analyst has a $20 price target on SHLD.  SHLD could spin off assets worth more than the price target of the analysts. So explain how what you said about the core SHLD position supports the analysts. If the spinoffs are worth more than $20. The core position can go to 0. It cant go negative can it?

[Luke 532]

 

Fairholme/Berkowitz added 3,468,073 shares in Q4 2013 (from 20,758,000 to 24,226,073)… an increase of 16.7% since the previous quarter.  I expected him to add but holy smokes that's a huge increase on an already very, very large position.

 

And Bruce is also so soft-spoken a gentleman, he wouldn't want to buy all the shares to spoil the fun for the shorts, not yet at least :)

 

Month       Shares   % Change

Feb-10       14,951,639

May-10       14,714,071   -1.6%

Aug-10       14,037,171   -4.6%

Nov-10       14,661,671   4.4%

Feb-11       14,917,873   1.7%

May-11      16,313,973   9.4%

Aug-11       16,380,680   0.4%

Nov-11       16,270,692   -0.7%

Feb-12       16,108,492   -1.0%

May-12       16,813,480   4.4%

Aug-12       16,829,880   0.1%

Nov-12       16,934,080   0.6%

Feb-13       18,146,573   7.2%

May-13       19,508,773   7.5%

Aug-13       20,393,000   4.5%

Nov-13          20,758,000   1.8%

Feb-14       24,226,073   16.7%

 

May 2011 is the only reporting period in the past 4 years in which the share count increase percentage was half or more of today's report.

 

Just speculating, but perhaps Berkowitz got confirmation that what he thought was going on behind the curtain is in reality taking place? After all, Cesar Alvarez was elected to the Board mid-December.  It wouldn't seem very logical for Berkowitz to increase his stake 16.7% (on a percentage basis more than twice of any other increase, other than May 2011, over the past 4 years) if things weren't progressing as he had hoped.

 

Alvarez to Board... http://searsholdings.mediaroom.com/index.php?s=16310&item=137259

[adesigar]

23.5 million shares.

 

http://www.sec.gov/Archives/edgar/data/1056831/000091957414000659/d1450713_13g-a.htm

 

nice  :)

 

BB certainly put his money where his mouth is. Now let's see how ESL and Eddie do...

 

Fairholme/Berkowitz added 3,468,073 shares in Q4 2013 (from 20,758,000 to 24,226,073)… an increase of 16.7% since the previous quarter.  I expected him to add but holy smokes that's a huge increase on an already very, very large position.

 

Its ok news not as impressive as you think. The Reason is  the Fairholme Funds (FAIRX + FAAFX) still hold exactly the same number of shares (15,093,573). The increase in holdings must be from the Fairholme Hedge Fund he started. Id be more impressed if he increased the holdings in FAIRX/FAAFX and not just purchases with new money.

 

 

Fairholme Fund 14,212,673

Fairholme Allocation Fund 880,900

============================

Total  15,093,573

 

 

 

[bmichaud]

The sec filing should be for the entire firm, not just individual funds within the firm.

[mcliu]

Also, the liabilities don't matter if you think they can spin out those companies without any of the liabilities attached...

Yes, they can spin Lands End, Auto Centers, etc without the liabilities, but then you are left with a weaker SHLD (they are spinning out the divisions with profits because that's the only way they can load them up with debt post-spin). As a result, core SHLD is smaller, less profitable, and has the same liabilities attached to it. Therefore that equity is worth less. So you get shares in the new independent businesses, but you will also take a hit on the value of your core SHLD position. You have to factor in both sides of the equation.

 

This was in relation to a question about how some analyst has a $20 price target on SHLD.  SHLD could spin off assets worth more than the price target of the analysts. So explain how what you said about the core SHLD position supports the analysts. If the spinoffs are worth more than $20. The core position can go to 0. It cant go negative can it?

 

Why not? There's no lower bound for an NPV analysis. What is the present value of a string for future losses?

[merkhet]

This was in relation to a question about how some analyst has a $20 price target on SHLD.  SHLD could spin off assets worth more than the price target of the analysts. So explain how what you said about the core SHLD position supports the analysts. If the spinoffs are worth more than $20. The core position can go to 0. It cant go negative can it?

 

Why not? There's no lower bound for an NPV analysis. What is the present value of a string for future losses?

 

The NPV can be negative, but if it's negative, then it no longer matters to shareholders because a shareholder can't lose more than their investment in the shares. There are limited situations in which a court can pierce the veil and go after shareholders, but this would not be one of those situations.

 

Fairholme/Berkowitz added 3,468,073 shares in Q4 2013 (from 20,758,000 to 24,226,073)… an increase of 16.7% since the previous quarter.  I expected him to add but holy smokes that's a huge increase on an already very, very large position.

 

Its ok news not as impressive as you think. The Reason is  the Fairholme Funds (FAIRX + FAAFX) still hold exactly the same number of shares (15,093,573). The increase in holdings must be from the Fairholme Hedge Fund he started. Id be more impressed if he increased the holdings in FAIRX/FAAFX and not just purchases with new money.

 

 

Fairholme Fund 14,212,673

Fairholme Allocation Fund 880,900

============================

Total  15,093,573

 

 

On the contrary, I find this more compelling if it's because of his new hedge fund. Berkowitz owns 783,000 personally. This means that the Fairholme Partnership owns the residual 8,349,500.  Assuming he bought every single share at close to the bottom tick of $33 a share, then that's a cost basis of $275 million.

 

http://online.wsj.com/news/articles/SB10001424052702304441404579119372754344050

 

From October 2013:

 

Bruce Berkowitz, the 55-year-old president of Fairholme Capital Management LLC, launched the fund on Jan. 1 and it has grown to $140 million, largely with money from Mr. Berkowitz and his employees. He is now seeking outside institutional investors and hopes the fund will grow to $1 billion in assets in a year.

 

Assuming he hit his $1 billion mark, this would be a 27.5% position for the fund. That's compelling. If he didn't hit his $1 billion mark, then it's an even bigger position.

[peridotcapital]

Also, the liabilities don't matter if you think they can spin out those companies without any of the liabilities attached...

Yes, they can spin Lands End, Auto Centers, etc without the liabilities, but then you are left with a weaker SHLD (they are spinning out the divisions with profits because that's the only way they can load them up with debt post-spin). As a result, core SHLD is smaller, less profitable, and has the same liabilities attached to it. Therefore that equity is worth less. So you get shares in the new independent businesses, but you will also take a hit on the value of your core SHLD position. You have to factor in both sides of the equation.

 

This was in relation to a question about how some analyst has a $20 price target on SHLD.  SHLD could spin off assets worth more than the price target of the analysts. So explain how what you said about the core SHLD position supports the analysts. If the spinoffs are worth more than $20. The core position can go to 0. It cant go negative can it?

 

The fact that the core can go to zero is why I think it is short-sighted when people say you can just "ignore" the liabilities. They assume Eddie spins off all the good stuff debt-free and leaves the bad stuff behind with all of the existing debt, which they say puts the equity holders in a better position relative to the bond holders. I don't see how equity holders don't take a hit (due to the liabilities) in that scenario (ignoring for a moment that he is currently doing the exact opposite by spinning off the stuff that doesn't fit).

 

If you buy SHLD at $35/share today and 5 years from now wind up with $75/share of "good" spin-offs, the value of your original SHLD equity investment could very well be zero (especially if there is still $4B of debt attached to the legacy "bad" assets). In that case you have $75 of valuable assets, but you didn't double your money. You took a $35 loss on the original shares you bought, have a $75 gain on the spin-offs you received, for a net value of $40 per share (for which you paid $35).

 

I just made up these numbers as an example, but the fact that the real estate alone might be worth double the current stock price doesn't really tell you much about the investment merits of SHLD stock at $35 today as long as you ignore the liabilities and the core operations.

 

I'm not saying I agree with a $20 target price, but if you assign a negative value to the retail business and think Baker Street's valuation assumptions are too high on the other stuff (this is essentially Gary Balter's view), that is how you would arrive at a target price like that.

[Luke 532]

In that case you have $75 of valuable assets, but you didn't double your money. You took a $35 loss on the original shares you bought, have a $75 gain on the spin-offs you received, for a net value of $40 per share (for which you paid $35).

 

Chad, take a closer look at what you just said.  If I buy SHLD at $35, I get spin-offs totaling $75, that gives me $110 in value.  If SHLD goes to $0, you still have $75.  $75 value on $35 cost basis is a gain of 114%.

[peridotcapital]

In that case you have $75 of valuable assets, but you didn't double your money. You took a $35 loss on the original shares you bought, have a $75 gain on the spin-offs you received, for a net value of $40 per share (for which you paid $35).

 

Chad, take a closer look at what you just said.  If I buy SHLD at $35, I get spin-offs totaling $75, that gives me $110 in value.  If SHLD goes to $0, you still have $75.  $75 value on $35 cost basis is a gain of 114%.

 

Ok, I'll stop typing now... clearly my brain needs time to rest. :)

[Luke 532]

In that case you have $75 of valuable assets, but you didn't double your money. You took a $35 loss on the original shares you bought, have a $75 gain on the spin-offs you received, for a net value of $40 per share (for which you paid $35).

 

Chad, take a closer look at what you just said.  If I buy SHLD at $35, I get spin-offs totaling $75, that gives me $110 in value.  If SHLD goes to $0, you still have $75.  $75 value on $35 cost basis is a gain of 114%.

 

Ok, I'll stop typing now... clearly my brain needs time to rest. :)

 

Well, it's early out there in Seattle.  After a cup or two of coffee you'll be back up and running :)

[Buckeye]

Also, the liabilities don't matter if you think they can spin out those companies without any of the liabilities attached...

Yes, they can spin Lands End, Auto Centers, etc without the liabilities, but then you are left with a weaker SHLD (they are spinning out the divisions with profits because that's the only way they can load them up with debt post-spin). As a result, core SHLD is smaller, less profitable, and has the same liabilities attached to it. Therefore that equity is worth less. So you get shares in the new independent businesses, but you will also take a hit on the value of your core SHLD position. You have to factor in both sides of the equation.

 

This was in relation to a question about how some analyst has a $20 price target on SHLD.  SHLD could spin off assets worth more than the price target of the analysts. So explain how what you said about the core SHLD position supports the analysts. If the spinoffs are worth more than $20. The core position can go to 0. It cant go negative can it?

 

The fact that the core can go to zero is why I think it is short-sighted when people say you can just "ignore" the liabilities. They assume Eddie spins off all the good stuff debt-free and leaves the bad stuff behind with all of the existing debt, which they say puts the equity holders in a better position relative to the bond holders. I don't see how equity holders don't take a hit (due to the liabilities) in that scenario (ignoring for a moment that he is currently doing the exact opposite by spinning off the stuff that doesn't fit).

 

If you buy SHLD at $35/share today and 5 years from now wind up with $75/share of "good" spin-offs, the value of your original SHLD equity investment could very well be zero (especially if there is still $4B of debt attached to the legacy "bad" assets). In that case you have $75 of valuable assets, but you didn't double your money. You took a $35 loss on the original shares you bought, have a $75 gain on the spin-offs you received, for a net value of $40 per share (for which you paid $35).

 

I just made up these numbers as an example, but the fact that the real estate alone might be worth double the current stock price doesn't really tell you much about the investment merits of SHLD stock at $35 today as long as you ignore the liabilities and the core operations.

 

I'm not saying I agree with a $20 target price, but if you assign a negative value to the retail business and think Baker Street's valuation assumptions are too high on the other stuff (this is essentially Gary Balter's view), that is how you would arrive at a target price like that.

 

Peridot, I am not sure I understand your math.  I get what you are trying to say but it looks like a double to me.  If you spend 35 and get 75 then your cost basis on the 75 is 35 no?  From the way that I read your explanation it seems like you are double counting the 35.  You are subtracting the 35 you spend (because it goes to zero) plus subtracting an additional 35 from the 75.  Am I reading this the right way or do I need more coffee?

 

 

[Buckeye]

Oops.  Looks like Luke beat me to it.  At least we all agree on coffee!:)

[peridotcapital]

 

Peridot, I am not sure I understand your math.  I get what you are trying to say but it looks like a double to me.  If you spend 35 and get 75 then your cost basis on the 75 is 35 no?  From the way that I read your explanation it seems like you are double counting the 35.  You are subtracting the 35 you spend (because it goes to zero) plus subtracting an additional 35 from the 75.  Am I reading this the right way or do I need more coffee?

 

Nope, I'm the one that needs the coffee. Maybe I should start drinking it... or take a day off here soon...

[Mephistopheles]

Also, the liabilities don't matter if you think they can spin out those companies without any of the liabilities attached...

Yes, they can spin Lands End, Auto Centers, etc without the liabilities, but then you are left with a weaker SHLD (they are spinning out the divisions with profits because that's the only way they can load them up with debt post-spin). As a result, core SHLD is smaller, less profitable, and has the same liabilities attached to it. Therefore that equity is worth less. So you get shares in the new independent businesses, but you will also take a hit on the value of your core SHLD position. You have to factor in both sides of the equation.

 

This was in relation to a question about how some analyst has a $20 price target on SHLD.  SHLD could spin off assets worth more than the price target of the analysts. So explain how what you said about the core SHLD position supports the analysts. If the spinoffs are worth more than $20. The core position can go to 0. It cant go negative can it?

 

The fact that the core can go to zero is why I think it is short-sighted when people say you can just "ignore" the liabilities. They assume Eddie spins off all the good stuff debt-free and leaves the bad stuff behind with all of the existing debt, which they say puts the equity holders in a better position relative to the bond holders. I don't see how equity holders don't take a hit (due to the liabilities) in that scenario (ignoring for a moment that he is currently doing the exact opposite by spinning off the stuff that doesn't fit).

 

If you buy SHLD at $35/share today and 5 years from now wind up with $75/share of "good" spin-offs, the value of your original SHLD equity investment could very well be zero (especially if there is still $4B of debt attached to the legacy "bad" assets). In that case you have $75 of valuable assets, but you didn't double your money. You took a $35 loss on the original shares you bought, have a $75 gain on the spin-offs you received, for a net value of $40 per share (for which you paid $35).

 

I just made up these numbers as an example, but the fact that the real estate alone might be worth double the current stock price doesn't really tell you much about the investment merits of SHLD stock at $35 today as long as you ignore the liabilities and the core operations.

 

I'm not saying I agree with a $20 target price, but if you assign a negative value to the retail business and think Baker Street's valuation assumptions are too high on the other stuff (this is essentially Gary Balter's view), that is how you would arrive at a target price like that.

 

At the end of Q3 the pension was $2.4 billion. I estimate that at the end of Q4 the debt will be $3.9, net inventories will be $4.4, and cash will be $1.8 pro-forma of the LE dividend. The pension will most likely be lower given the market's rise. These 4 items roughly all cancel each other out.

 

Now for the market cap of $3.9 billion you get all the assets. $1.8 for KCD, $300 million for LE, $500 million for the warranty business, and you are left with $1.3 billion for the real estate, home services, and whatever else I left out.

 

Also, off the top of my head I think that for every 100 bps of interest rate rise the pension decreases by $674 million. That means that if rates move up by say 300 bps, it will be nearly wiped out. This should drive significant extra value. Now one major liability I didn't include is store severance/closing costs. But let's just say that balances out with the decrease in pension.

 

PS: I didn't account for SCC, since these are all consolidated. I'll pull those numbers up later though.

[Luke 532]

Also, off the top of my head I think that for every 100 bps of interest rate rise the pension decreases by $674 million.

 

Yep...

 

In SHLD's 10K they say that a 1% decrease in the discount rate used for pension liabilities would increase the liability by $814 million

 

They say that a 1% increase in the discount rate used would decrease the liability by $674 million

[JSArbitrage]

The problem with the spin-off situation is as follows: (1) The market will probably only give value to positive EBITDA spin-offs and (2) SHLD is already struggling with negative EBITDA and negative operating income.  So for every good business that is spun-out, the losses from the bad business are magnified. 

 

For Lands End, it seems as if Eddie is adding debt to SpinCo and then spitting a dividend to HoldCo.  That is not a good sign for future spin-offs.  It could mean (a) the legal advisors required it in order to prevent any gripes from the debt holders or (2) he needs liquidity at HoldCo very badly.  Otherwise, he could have spun LE first, added the debt after spin and then paid cash from LE directly to LE shareholders.  That would have removed HoldCo's claim against the cash.

 

This is a great case study for young investors like myself. 

[adesigar]

Fairholme/Berkowitz added 3,468,073 shares in Q4 2013 (from 20,758,000 to 24,226,073)… an increase of 16.7% since the previous quarter.  I expected him to add but holy smokes that's a huge increase on an already very, very large position.

 

Its ok news not as impressive as you think. The Reason is  the Fairholme Funds (FAIRX + FAAFX) still hold exactly the same number of shares (15,093,573). The increase in holdings must be from the Fairholme Hedge Fund he started. Id be more impressed if he increased the holdings in FAIRX/FAAFX and not just purchases with new money.

 

 

Fairholme Fund 14,212,673

Fairholme Allocation Fund 880,900

============================

Total  15,093,573

 

 

On the contrary, I find this more compelling if it's because of his new hedge fund. Berkowitz owns 783,000 personally. This means that the Fairholme Partnership owns the residual 8,349,500.  Assuming he bought every single share at close to the bottom tick of $33 a share, then that's a cost basis of $275 million.

 

http://online.wsj.com/news/articles/SB10001424052702304441404579119372754344050

 

From October 2013:

 

Bruce Berkowitz, the 55-year-old president of Fairholme Capital Management LLC, launched the fund on Jan. 1 and it has grown to $140 million, largely with money from Mr. Berkowitz and his employees. He is now seeking outside institutional investors and hopes the fund will grow to $1 billion in assets in a year.

 

Assuming he hit his $1 billion mark, this would be a 27.5% position for the fund. That's compelling. If he didn't hit his $1 billion mark, then it's an even bigger position.

 

Nope you cant use 8 million shares in your calculation. Fairholme already held over 20 million shares, 15 million for the mutual funds and I believe 5 million shares held in other assets it manages for high net worth individuals etc. The site for that I think is https://clients.fairholme.net/ 

 

What I was trying to point out (and I wasn't very clear) is he added about 3.5 Million shares but non a single share in his mutual funds. All of the addition was done in the private accounts/hedge fund. Id have been more impressed if he had increased SHLD in his mutual fund holdings which would mean selling AIG or BAC.